Advantages Of Outsourcing To Multiple Providers Information Technology Essay
Globalisation involves higher competition resulting in companies looking for gaining competitive advantages over others. The globalisation vs. localisation discussion is linked to the question of outsourcing vs. insourcing (appendix A.1). Outsourcing consists of nearshore outsourcing and offshore outsourcing. The latter will be applied in this paper. For some companies, outsourcing may be a possibility to achieve competitive advantages. For other companies insourcing could be the better solution. Furthermore, companies, when coming to the decision to outsource, have to face the paradox whether to outsource to a single service provider or to multiple.
Firstly, outsourcing and insourcing are presented generally in order to facilitate important information about outsourcing to a single supplier. Then outsourcing to multiple suppliers is explained with advantages, disadvantages as well as governance and finally IT outsourcing is demonstrated.
This is shown in a practical example, a case study: Shell Outsourcing Deal 2008. Shell outsourced its IT to three service providers. This example merges outsourcing to multiple suppliers with IT outsourcing and reveals the theoretically explained aspects in practice and why Shell decided to outsource its IT to multiple suppliers.
Outsourcing generally describes the transfer of goods and services, which were performed with own means by the company, to a third party (Online Lehrbuch S. 2). The service provider , generally one, takes over the complete responsibility for the outsourced field.
Offshore outsourcing is linked to the transfer of company’s activities to wholly owned subsidiaries or service providers to other countries from the customer’s location (Oshri et al., 2009, p.15). These countries have enormous and easily accessible resources which offer competitive advantages to the outsourcing company (Offshore Outsourcing, 2011).
Are the company’s activities transferred to a neighboring country, this is called nearshoring. Benefits of nearshoring are e.g. the connection in regard to the “geographical, temporal, cultural, linguistic, economic, political, and historical” (Oshri et al., 2009, p.46) situation.
Outsourcing to a single provider offers companies several advantages in a globalising world to obtain the increasing competition.
Advantages of outsourcing
Disadvantages of outsourcing
Cost advantages as special knowledge saves time, costs for personnel and investments are broken up on several companies and fixed capital can be utilised elsewhere as well as the the liquidity of the company can be increased
In reality costs often rise when outsourcing potentials are not used sufficiently or specific outsourcing costs were not considered in the planning, fixed costs are insufficiently reduced, costs for the service provider can be higher than own costs as many companies miscalculate own costs
Higher strategic flexibility in regard to market changes
Performance risks as knowledge and know-how wander off
Investments undertaken by supplier
Additional entrepreneurial load as higher security is necessary
Access to external know-how
Possible resistance in the workforce
Increase of possibilities for innovation due to collaboration
Dependence on the service provider and excessive demands
Smaller companies can adapt to current standards and achieve requirements
Suffering of quality due to weak communication, shortage in resource or capacity and capability of service provider
Discharge for companies in areas, which do not belong to their core competencies
Langauge and culture barrier – risk to communication
Fig.1: Advantages and disadvantages of outsourcing (Expertscolumn, 2009; OnlineLehrbuch, 2011).
By managing and minimising the above mentioned risks due diligence plays an important role (Reed, 2011). Moreover, it is important to understand the risks companies face when outsourcing as those can also enhance due to the geographical distance between the company and the service provider. To avoid the emergence of any of the mentioned risks the partners should keep a risk register which distinguishes and lists all possible risks connected to the outsourced service. This should be then maintained over the whole period of operations.
2.1.2 Insourcing in general
Insourcing describes the reintegration of processes, belonging to the core competencies of a company, which possibly have been outsourced before (Gabler Wirtschaftslexikon, 2011).
Advantages of insourcing
Disadvantages of insourcing
Transparency and comparability of costs for particular goods and services
Higher costs due to initial costs, labour costs and costs for materials
Decrease of dependence on suppliers
Training period for employees
Increase in scope for actions
Foundation of a new department (potentially)
Integration of goods and services in the company processes
Creation and determination of tools for controlling the work flow
Encouragement of internal competencies
Arising of synergy effects
Consistency in the data
Fig.2: Advantages and disadvantages of insourcing (Active Sourcing AG, 2011; Leads Stürmer, 2011)
2.2 Outsourcing to multiple suppliers
Today, many companies outsource not only to one service provider but to multiple as this offers them even more competitive advantages (Siemens, 2011). The main point for the success of outsourcing is to outsource the correct task to the correct supplier using the correct contracts and a powerful governance process. Various business conditions favour using multiple suppliers than just one. Firstly, business complexity: Companies have different levels of business complexity. Generally, industries which change slower have easier manageable environments, constant processes and accountable needs. For these companies long-term outsourcing to one service provider offers great options.
However, many companies do not have the environment mentioned above. For these organisations long-term outsourcing to a single service provider is risky as they have varying support needs and dynamic operations and generally no single service provider can offer the technical and geographical expertise to fulfill their needs. For these companies, which show a higher level of business complexity, outsourcing to multiple suppliers might be a more effective approach considering that they have the internal abilities and governance structures to manage this approach.
The independence of separate business units in a company can vary in regard to budgets and decisions about service providers and support. Separate business units often work out individual business applications. The higher the level of independence of business units, the greater the challenge of creating controlled and managed support. Therefore many companies, having a high level of independence, prefer outsourcing to multiple suppliers as their business units have the liberty to choose individually according their needs. Nevertheless, the central departments can keep control.
2.2.1 Advantages of outsourcing to multiple providers
Outsourcing to multiple providers exists in various kinds (Siemens, 2011). Diverse suppliers can be chosen to support e.g. diverse business units or business lines. Companies can also choose suppliers by reason of their expertise or geographic location and coverage.
Fig. 3: Overview of outsourcing to multiple providers (Practical Law Company, 2007)
Advantages of outsourcing to
Disadvantages of outsourcing to multiple suppliers
Better levels of control and management
Management of several suppliers
Flexibility to decide on providers which meet particular needs (e.g. shorter durations for companies rethinking and reorganising promptly)
Ensurement of a good level of cooperation amongst suppliers – responsiibility is doubled (organisation and suppliers)
Improvement of service delivery
Interdependencies can complicate and obstruct activites
Stimulation of competition between the suppliers, e.g. dependence
Service providers working in alike sectors may be careful regarding sharing information when cooperating
Reduction of risks generated when outsourcing to a single provider
Fig.4: Advantages and disadvantages of outsourcing to multiple suppliers (Siemens, 2011)
These aspects show that single service providers are generally not able to solve all outsourcing and service needs. The skills necessary to support distributed infrastructure are most likely distinctive to those supporting particular business applications.
2.2.2 Governance of outsourcing to multiple service providers
Being successful in any outsourcing involvement is based on various points (Oshri, et al., 2009, p.112). Setting up an outsourcing governance in the company can enhance a possible success. Therewith companies introduce a higher complexity of the outsourcing relationships, an internal team, best practices and instruments to assure an advantageous management.
Most companies use a three-tier structure when designing the governance (Oshri, et al., 2009, p.113). This includes executive-to-executive relationships concentrated on relationship management and on joined goals. An outsourcing management operates between executives, business units as well as outsourcing project teams. The operational management is concerned with day-to-day issues.
Important is that companies do not reduce the management concentrating on the actions. To achieve the benefits, outsourcing offers, governance plays an important role.
2.3 IT outsourcing
Reasons to introduce outsourcing in the area of IT vary from one company to another (Dibbern et al., 2004). However, a few reasons explain the decision to outsource in general: The manager’s interest in reducing costs or outsourcing as a possibility to establish a new department, when the former failed. Some companies, which main competence is not IT outsource its IT department to assign time-consuming issues to other companies. This can be especially advantageous for companies whose actions can change significantly from one period to another.
2.3.1 IT outsourcing lifecycle
Fig.5: IT outsourcing lifecycle (Oshri et al., 2009).
The IT outsourcing lifecycle, established in 2005, consists of four phases: architect, engage, operate and regenerate (Oshri et al., 2009, p.94). These phases are subdivided in 9 blocks. Each phase and the attached blocks design the way for the next phase. This means that the success of each block depends on the previous ones.
The architect phase incorporates four blocks and builds the basis for outsourcing ventures (Oshri et al., 2009, p.96). The first block is named ‘investigation’ and aims to replace ideological beliefs with goals. Therefore the company gathers information. The second block ‘target’ is set out to identify in which areas outsourcing would be advantageous. For that reason goals are matched to an appropriate outsourcing model. Moreover, criteria for possible service providers and the scope of outsourcing are determined. ‘Strategy’ is geared towards the planning to ensure effective decision making for the rest of the lifecycle (Oshri, et al., p.97). That’s why a decision about the rollout approach takes place .The last block in this phase ‘design’ concludes the architect phase with a definition of the planned configuration.
The engage phase consists of two blocks. Firstly ‘select’, here the best vendor for the company is supposed to be found. In this block the content of the outsourced work is planned, the most appropriate evaluation team is identified along with the evaluating criteria and interactive evaluation techniques (Oshri et al, 2009. p.98). ‘Negotiate’ aims to conclude a good contract. Therefore an appropriate negotiation strategy is set and a negotiation team is put together.
The operate phase includes two blocks, ‘transition’ and ‘manage’. In the ‘transition’ block the aim is to ensure an effective and smooth “hand over” of the IT services to the provider. Therefore, plans are finalised, the impact on the staff and the staff transfer is managed as well as knowledge retention and transfer as well as governance structures are set up (Oshri et al., 2009, p.99). ‘Manage’ is set out to manage the outsourcing relationship properly. Key activities are investing in the relationship and continuous examination of the relationship.
The last phase, ‘regenerate’ phase, consists of the block ‘refresh’ and aims to support the client on deciding whether to reappoint in further contracts with the service provider. Outcomes and future requirements are assessed. In the last phase the outsourcing starts again, depending on the decision whether to re-tender, re-negotiate or back-source (Oshri et al., 2009, p.100).
The IT lifecycle offers companies an accurate plan for their outsourcing concerns. It is a relatively new model, which on the one hand ensures up-to-dateness, but on the other hand does not offer a long-term view. However, I would critique that all blocks are arranged consecutively, meaning if something goes wrong in one block that might involve issues in following blocks. Also, I think, problems may arise in defining in which phase and block the outsourcing operations are at a particular moment or if the operations are ready to move to the next phase or block. There is no set duration as this varies from one company to another. Additionally, I would like to mention, that the IT outsourcing lifecycle is a model, which means that certain aspects are left out. Every company should examine this and consider additional aspects. I would suggest that companies, considering to use the IT outsourcing lifecycle ‘walk-through’ the lifecycle before going on. This could e.g. take place in the architect phase, then the persons responsible would be aware of the complete lifecycle. Nevertheless, I evaluate outsourcing as more successful when it is proceeded as a lifecycle than in a one-off transaction.
3 Shell Outsourcing Deal 2008
In 2008 the mineral oil group Shell signed a five-year outsourcing contract with three suppliers responsible for the IT infrastructure (see appendix A.2 for a company description). These were T-Systems, EDS and AT&T (Computerwoche, 2008) (see appendix A.3 for more background information). Shell kept strategic control and some specialist services. This is called Outtasking/Managed Services (Appendix A.4 for information on IT outsourcing models) (TPI, 2009). This was one of the largest and most complex business transformations.
3.2 Reasons for Shell to outsource to multiple service providers
As times get more and more turbulent and companies face a highly competitive environment Shell decided to outsource to multiple service providers as they believe that competition leads to a successful future and wanted to carry on developing its strategy “More Upstream, Profitable Downstream” (TPI, 2009). That means to expand company’s hydrocarbon reserves as well as production along with the ensurement of manufaction, marketing and distribution in a cost-effective and efficient manner. Additionally, Shell aims for innovation, which they believe the three service provider can offer when collaborating well to develop new goods for them and therefore also for Shell (Rosenthal, 2009). According to Rosenthal (2009) Shell wanted to reduce the risk in case one service provider is not able to perform. Lastly, an important reason for Shell to outsource its IT to multiple suppliers is the ability of working with foreign markets. Here, T-Systems, a German company, can ensure a working relationship with countries, which do not favour American workmen. Shell’s general aim was to encourage higher efficiency and performance, however no detailed aims were announced.
Originally, Rosenthal (2009) explains, Shell made the decision to outsource IT as the company missed a commercial accuracy and operational discipline. The IT department could not meet the company’s overall requirement.
When making the outsourcing decision Shell had in mind to focus on strategic issues, the skill to respond quickly and being agile as well as sustainable, meaning the ability to serve in 20 countries (TPI, 2009). Moreover, Shell wanted to:
Pay attention to company’s needs and IT opportunities
Expand the value from suppliers involved in the IT infrastructure
Be more flexibel in service capacity to manage peaks as well as troughs
Manage expanding costs of maintaining existing IT infrastructue and developing new
Shell decided to outsource the greatest part of its IT infrastructure as the company itself had difficulties managing this (Rosenthal, 2009). When facing the paradox of outsourcing to a single supplier or to multiple suppliers, Shell aimed for outsourcing to multiple suppliers as this approach offered the company competitive advantages in regard to being able to serve in 20 countries, to keep better control as the company kept the strategic control as well as the belief that competition leads to success.
3.3 The IT lifecycle at Shell
Shell gathered insights and rephrased ideological beliefs into goals (TPI, 2009):
Seperate responsibilities for business needs and strategic control
Expand service reliability as well as performance
Assure access top talents and innovation
Decrease costs and turn fixed into variable costs.
Shell decided to outsource most of its IT, but to hold strategic control and few specialist services.
Shell determined to outsource not only to one service providers but to multiple.
Shell considered the following when designing the programme:
Agree on the mission statement and business targets
Create and spread the plan
Establish a high-performance team
Develop diversity in the team
Prioritise change and communication management
Shell selected appropriate suppliers for their outsourcing programme.
With these suppliers Shell negotiated contracts and could conclude efficient contracts with EDS, AT&T and T-Systems. The service providers signed a so-called Operating Level Agreement to guarantee a high level of collaboration.
Shell handed over the IT infrastructure in a sensible manner (Rosenthal, 2009). All in all, 3,500 IT employees were transfered from Shell. This gave employees the better career possibilities and knowledge transfer opportunities. A detailed investigation of six months gave the service providers the possibility to develop the necessary solutions for the implementation.
As Shell still keeps the strategic control, the company helds good relationships to their suppliers and monitors them regularly.
As the contracts are laid out for five years no information about the regenerate phase are available yet.
Shell delegated governance and therefore several roles emerged, e.g. a Shell executive commitee, an executive tender board or commercial deal teams (TPI, 2009). The most important one is the programme management office to develop and maintain the implementation plan as well as to monitor and report the progress and deliverables.
3.5 Early benefits
“Shell’s IT infrastructure costs dropped by double digits” (Rosenthal, 2009) and the service increased clearly and became more reliable. Rosenthal (2009) views that outsourcing made Shell more efficient and the team concentrates on up-to-date IT solutions to meet Shell’s needs.
Rosenthal (2009) mentions that the three solutions providers convey projects and run systems better than Shell did formerly.
In the beginning the approach with three suppliers was not working out well (Rosenthal, 2009). They firstly had to get to know each other and to learn working together effectively. Today however, the collaboration between the companies occurs in a flawless mannner.
Generally, it has to be mentioned; according to Rosenthal (2009) that the service providers underestimated Shell’s complexity as Shell is a globally acting company and their approach was more regional.
Eventhough early benefits of the outsourcing deal could be identified problems arose. T-Systems, one of the suppliers, had many problems when handling the IT of Shell (Inside-IT, 2010). This was due to the insufficient experience with deals of this size. Moreover, T-Systems also has not achieved the savings it was supposed to manage (Louven and Hofer, 2010). Louven and Hofer (2010) explain this with T-Systems being an affiliate of the German telecommunication company Telekom and therefore stuck in their complex structures.
3.7 Critique on Shell’s approach
Due to the extensive research I found out that Shell did not perform the lT lifecycle in a preferable manner, as Shell did not extensively prepare for the lifecycle and also did not name additional aspects. This could have led to the above explained problems, eventhough these were more on service providers’ side. However, Shell managed the transition phase extremely well and set up an extensive governance structure. Also, only 3 of the planned 5 years passed, therefore no final evaluation can occur.
4 Overall conclusion
Various advantages and disadvantages of outsourcing and its opposite insourcing were recognised. Nowadays more companies choose outsourcing to multiple suppliers instead of its paradox, outsourcing to a single supplier, when deciding to outsource. Therefore outsourcing to multiple suppliers was presented with advantages and disadvantages as well as the necessary governance, The explained IT lifecycle made the connection to the case study: Shell Outsourcing Deal 2008. A background offered important information about the companies Shell, EDS, AT&T and T-Systems in regard to the outsourcing deal. Several reasons were explained why Shell outsourced its IT in 2008 and why the company decided to use a multiple suppliers approach. Moreover, the IT lifecycle in connection to this particular outsourcing deal was analysed and the governance was pointed out. Finally, early benefits of the outsourcing deal for Shell alongside problems which occured, were pointed out and a critique on Shell’s approach was undertaken.
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